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Entrepreneurs can play a central role in finding solutions to the world’s toughest social problems. The failure rate for start-ups, however, is high. And new ventures in emerging economies face such challenges as uncertain prices and costs, nonexistent or unreliable infrastructure, and unpredictable competitive responses.

The authors offer guidelines for launching successful businesses in uncertain markets. One of those guidelines, discovery-driven planning (a well-known process developed by MacMillan and Rita Gunther McGrath), helps managers test their assumptions about preliminary business models and revise them on the basis of emerging data.

The remainder were informed by the authors’ efforts, with the Wharton Societal Wealth Program, to help launch socially beneficial ventures in Africa and the United States. Those guidelines include outlining the minimum number of people a venture should serve and the minimum level of profitability it should achieve; identifying important stakeholders; planning how to terminate the venture in an acceptable manner; and anticipating unintended consequences of the enterprise.

The lessons aren’t just for entrepreneurs. The management teams of multinationals, foundations, and NGOs can apply them to any challenging and highly uncertain business situation. In doing so, they can better control their costs, minimize the effects of surprises, and increase their impact on society.

The Idea in Brief

Many entrepreneurs go into emerging markets with fixed plans and the best of intentions: Launch a business, solve a problem. But the dearth of information about customers, cultures, and competitors often stops them in their tracks.

The authors offer five guidelines for creating markets in uncertain environments.

1. Define the ballpark—or the scope of the venture. What are you trying to do, and what constitutes success?

2. Attend to the sociopolitics. How will you mobilize supporters and neutralize opponents?

3. Emphasize discovery-driven planning. What will emerging data teach you about your proposed business model?

4. Plan disengagement. How can you exit without leaving a large footprint?

5. Try to anticipate unintended consequences. What kinds of second-order effects, both negative and positive, is your venture creating?

Artwork:Josh Keyes,
Sprout II, 2009, acrylic on panel, 30″ x 40″

In recent years, we’ve all experienced considerable volatility—financial breakdowns, natural disasters, wars, and other disruptions. It’s clear we need new approaches to the world’s toughest economic challenges and social problems. Entrepreneurs can play a central role in finding the solutions, driving economic growth (building infrastructure, developing local talent, infusing struggling regions with investment capital) and helping hundreds of millions of people worldwide. If successful, socially minded entrepreneurial efforts create a virtuous cycle: The greater the profits these ventures make, the greater the incentives for them to grow their businesses. And the more societal problems they help alleviate, the more people who can join the mainstream of global consumers.

The failure rates for new companies and markets, however, are high. That is true anywhere in the world, including emerging economies. The management challenges associated with producing and marketing goods and services at the base of the economic pyramid include imperfect markets, uncertain prices and costs, nonexistent or unreliable infrastructure, weak or totally absent formal governance, untested applications of technology, and unpredictable competitive responses. Given this daunting uncertainty, entrepreneurs need a framework for “unfolding” success from a perceived or an emergent opportunity.

Turning Uncertainty into Risk

The discovery-driven process of transforming the uncertainty around a business venture into risk (which can be managed) allows leaders to experiment, learn, and either develop a plausible business model or abandon the project early and at little cost. The idea is to reduce uncertainty to the point where probability distributions can be assigned to expected outcomes, making them plannable—that is, you develop ideas to the point where it’s possible to use conventional methods of assessing risk. When you simply don’t know what will happen, when there are as many possible answers as there are questions, there’s a big opportunity for effectuation—that is, for just starting something inexpensively, for taking some sort of action that has an outcome. By analyzing these preliminary results, you can then further develop your ideas, monitor your progress, and exploit the evolution of any plausible model that emerges.

Entrepreneurs and others who want to launch businesses in, say, Latin America, Asia, or Africa but lack reliable data about those environments need to put together the best models and mechanisms they can, documenting their assumptions as they go. Critically, however, they need to systematically test each of the assumptions underpinning their preliminary models against a series of checkpoints and be prepared to change on the fly, redirecting their efforts through a process known as discovery-driven planning. In this way, they can act on emerging evidence instead of obstinately and blindly pursuing infeasible objectives. (See Rita Gunther McGrath and Ian C. MacMillan’s “Discovery-Driven Planning,”HBR July–August 1995.)

What Is Discovery-Driven Planning?

Discovery-driven planning is a practical tool (introduced in a 1995 HBR article by Rita Gunther McGrath and Ian C. MacMillan) that acknowledges the difference between planning for a new venture and for a more conventional line of business. It recognizes that at the start of a venture, little is known and much is assumed. When new data are uncovered, they are incorporated into the evolving plan. The real potential of the venture is discovered as it develops. With conventional planning, managers can (fairly accurately) extrapolate future results from a platform of past experience. Deviations from plan are considered a bad thing. By contrast, new ventures call for entrepreneurs to envision what is uncertain and not yet obvious to the competition. They must make do with assumptions; and because these assumptions generally turn out to be wrong, new ventures inevitably experience (often huge) deviations from original targets. Entrepreneurs must establish checkpoints at which they convert assumptions into firmer knowledge before making major investments.

However, this method of planning is necessary but not sufficient to handle high-uncertainty ventures. In the following pages, we’ll look at how to combine discovery-driven planning with four other guidelines for building successful businesses in uncertain markets that we developed during a sustained field program carried out by the Wharton Societal Wealth Program (WSWP). Specifically, we’ll consider four social enterprise projects we helped launch in Africa and examine how the guidelines informed the work in each.

It’s important to note that the lessons here aren’t just for entrepreneurs. The management teams of established multinationals, foundations, large NGOs, and other nonprofits can apply them in any challenging and highly uncertain business situation. In doing so, they can better control their costs, increase their impact on society, minimize the effects of surprises, and know when to disengage from questionable projects.

Lessons from the Field

As part of our research in the WSWP—a nine-year-old field research program at the University of Pennsylvania’s Wharton School of Business intended to examine the use of business models to develop projects that attack societal problems—we worked with 10 groups of local entrepreneurs trying to launch base-of-the-pyramid ventures in the United States and several African countries. Each project faced some or all of the elements of uncertainty cited earlier. In a few instances, even the initial objectives and desired outcomes were unclear, which made it tougher to make decisions about where and how to allocate resources.

We and our student teams worked with each venture, reviewing socioeconomic and political factors as well as market and competitive conditions, conducting interviews with project participants, and observing and documenting their operations. We helped the entrepreneurs establish strategic partnerships where appropriate, develop business plans, and deploy relevant technologies. Our insights from the fieldwork have been distilled into the following guidelines for creating new business models in emerging or other highly uncertain markets.

1. Define the ballpark—or the scope of the venture.

This is a three-part process. First, concretely outline the disqualifying conditions, the factors that would preclude the venture’s launch. These might include an inability to scale operations, an environment in which corruption is rampant and can’t be circumvented, situations in which the necessary equipment is of poor quality and is difficult to operate and repair, and a lack or shortage of suitable talent. Second, define your acceptability space: the minimum number of people the venture should serve and the minimum level of profitability it should attain. And third, after a thorough review of the economic, national, and cultural contexts in which the venture will operate, draw up the business’s rules of engagement. These might include tenets such as “no sales on credit,” “no transgressions of home or host country laws,” or “absolutely no payments of bribes.” All three filters will help you allocate scarce resources only to ventures that satisfy minimally acceptable outcomes.

2. Attend to the sociopolitics.

Before you even start, you must develop a fine-grained view of important stakeholders, their roles, and the resources they can provide. Identify beneficiaries—the (often reluctant) parties who stand to gain from the venture but could nonetheless be initially skeptical of it; potential allies—those most likely to support the project; needed indifferents—those unlikely to care much about the project but whose support may be critical; and meaningful opponents—those who will be adversely affected by the success of the project and have the wherewithal to obstruct it. With such an analysis in hand, you can figure out how best to mobilize supporters and neutralize opponents.

3. Emphasize discovery-driven planning.

From the get-go, recognize the evolving nature of your project. Of course, you must delineate the initial business model, the delivery mechanisms, and the value proposition for customers. But you’re probably going to be wrong. The idea is to start with a clearly hypothesized model for the venture, launch it at the lowest possible cost, and use the business data that emerge to continuously update your assumptions, systematically learning your way to the eventual solution.

You must delineate the initial business model for the venture and the value proposition. But you’re probably going to be wrong.

First, specify both the unit of business and the unit of benefit. The unit of business is the transaction unit for which the customer pays—for example, a sack of grain, an hour of service, or a load of materials hauled. The unit of benefit is the metric by which societal impact will be measured—for example, a daily protein serving, a patient treated, or a person taught to read a simple book. There may be few precedents on which to base your assumptions about those factors, but developing and specifying initial assumptions will help you articulate your business and revenue models. Make sure to document your hypotheses and delineate a series of checkpoints at which you’ll test them before making major investments in the venture.

Second, anticipate the challenges of growth. One of the biggest obstacles to scaling up ventures in emerging economies, for instance, is the shortage of management talent and expertise. It’s difficult to attract experienced employees and partners (or even high-potential candidates for education and training) to an uncertain venture. This limitation alone can seriously undermine aggressive growth plans.

4. Plan disengagement.

There is more than just financial capital at stake in societal-wealth-generating initiatives; the livelihoods and well-being of hundreds, if not thousands, of people also hang in the balance. Before you begin, you must plan how you could disengage with a minimal footprint. How could you exit in an acceptable manner? Could you sell off or donate equipment or other assets? Could you shut down until conditions (say, access to electricity) improve?

5. Try to anticipate unintended consequences.

Recognize that societal interventions (and, in fact, any form of commercial intrusion) in emerging markets can create unintended second-order effects, both negative and positive. For instance, when various NGOs and governments encouraged intensive growth in shrimp farming in order to bolster local economies and create new export markets, mangrove forests in parts of Thailand and China were decimated.

Putting the Guidelines to Work

These five guidelines can be applied to any new-market-creation challenges—for instance, finding markets for radically new technologies such as nanotechnology, or developing submarkets (such as Chinese and Indian teenagers) in rapidly growing economies. Let’s look at four of the 10 Wharton projects and see which guidelines were particularly germane in the case of a venture that has been very successful, one that has been only marginally so, one for which the jury is still out, and one that has been discontinued.

Success: The Feeds Project

The goal of this venture was to produce high-quality, low-cost animal feed in northwest Zambia so that small-scale chicken farmers could generate food for themselves and income from the sale of surplus chickens at competitive prices. The region, known for its copper production, faced staggering levels of unemployment in the 1980s and 1990s, after several mines were shut down. This led to severe malnutrition; many people were close to starvation. The leaders of the Feeds Project started small: Six men, working in a shed, used shovels to mix the feed (a combination of corn, soya, minerals, and other nutrients). The plan was to distribute it through centers affiliated with a large, well-established corporate group. Here’s how the Feeds Project applied several of the guidelines:

Scope.

The project sought to increase regional consumption of chicken meat by at least 1 million servings per year and to generate a return on sales of animal feed (the bulk of which was for poultry) of at least 12% within three years. The venture would sell its feed for cash, not credit. Initially, it could not poach customers from established regional competitors, nor could it purchase any assets before demonstrating proof of concept. Harsh terms, perhaps, but they acknowledged the difficulties of doing business in a region where bad debt was rampant and uncollectible, and established competitors responded to threats with drastic price-cutting.

Sociopolitics.

Many small-scale farmers had little confidence in their ability to raise chickens profitably. So, with cooperation from leaders in each village, the lead entrepreneur of the project designed an education program to convince these potential beneficiaries of the viability of chicken farming. Going from village to village, she held simple but powerful seminars in which she explained possible financial outcomes and discussed which types of poultry to breed and how to prevent disease. Only then did new growers begin buying the feed.

Discovery.

The local entrepreneurs initially assumed that farmers would buy feed by the sack; however, many customers lacked easy access to affordable transportation and needed enough feed for six to eight weeks (a production cycle) at a time. So the venture leaders updated their distribution system accordingly. As demand grew, they expanded their operations and product offerings, first by salvaging discarded equipment and then by purchasing new equipment that could churn out more than 2,000 tons of feed per month, including high-quality poultry pellets.

Farmers don’t buy feed by the sack, as had been assumed. The venture needed a new distribution system.

Second-order effects.

The project is generating negative and positive second-order effects. One rather bizarre outcome: As the plant expands to fulfill the demand for more feed for ever-more chickens, communities have to deal with an excess of chicken feathers. There is currently no way to recycle them, and demand for cushions and comforters in a poor, tropical society is limited. So the entrepreneur is developing a furnace for the feathers. Still, positive effects abound: Hundreds have entered the chicken-farming market, many of them hiring as they expand. The greater efficiency of the feed market has led to greater investment: New hatcheries and processing facilities are being built across the region. Several churches are attempting to establish community-based poultry programs in remote areas, and a new market for product sales has opened up in a neighboring country, where the project is already negotiating to develop a feed manufacturing plant.

The Feeds Project, initially created for small poultry breeders, selling for cash in local markets, is now supplying larger commercial poultry growers, mining kitchens, and retail chain stores. It offers broader product lines (such as different size bags and life-cycle-stage formulations) as well as feed for other species, such as dogs and dairy cattle. The path to scaling the business has been through higher-quality machinery, expanded distribution, and moves into adjacent markets.

Marginal Success: The Cookie Project

Huge numbers of uneducated, unmarried mothers in South Africa eke out a precarious living, barely able to feed their children. The Cookie Project was conceived in 2004 to train such women to operate bakeries in distressed areas, making high-quality cookies (using natural ingredients) for health-conscious consumers throughout the country.

The pilot site was in the township of Mfuleni; the lead entrepreneur launched it there because she found a small facility, donated to the township by a wealthy woman from Europe, that had electricity, running water (but no hot water), and, most important, three working ovens. The entrepreneur “leased” the facility from the community, rent-free, in exchange for training and jobs for local women. The company has now relocated to a larger plant. The next step will be to replicate the operation, first in other parts of Africa and then in India and Latin America—but only if the business model can be proven to deliver investment-grade profitability. The entrepreneur has calculated the sales required to create new jobs (building in the cost of training each employee). Here are some guidelines the team used to achieve early success:

Scope.

The acceptability space the lead entrepreneur set for the project included training and employing a minimum of 300 so-called unemployables. Apart from learning how to produce cookies, the women were also trained in basic life skills, such as household budgeting and personal hygiene. The venture also set a financial goal: to earn $100,000 in profits in South Africa in the third year of operations.

Sociopolitics.

Potential employees had been so beaten down by their adverse circumstances that they had to be convinced that they could, in fact, find gainful work without being exploited. And uninvolved but influential members of the community initially resisted the project for fear that it would decrease their influence. A local elder, for instance, thought that the venture was making too much money, thus undermining her position. (She had no concept of net profits—she just saw hundreds of cases of cookies going out the door.) She and other elders demanded a large fee from the project to continue using the community building. The entrepreneur (and the employees) spent considerable time talking with the elders, explaining the project’s profit challenges, broader goals, and the resulting expansion of the local economic base.

Discovery.

The original business model was sales of home-style cookies to local distributors. These days, however, the Cookie Project has access to sophisticated food scientists, uses best-in-class ingredients, and exports its products to the United States. It also employs men and women on both sides of the Atlantic.

The financial challenge remains; building a new food brand in the current economic climate is tough. If the venture fails to come up with a profitable distribution model, it may need to redirect its strategy toward e-commerce in order to reduce its marketing costs and extend the lifespan of its current investments.

Disengagement.

The lead entrepreneur of the Cookie Project decided that even if the project proved untenable, at the very least it would have considerably enhanced the employability of its workers. They would know, for example, how to read a basic invoice, write checks, and manage customers. Each woman was treated as an entrepreneur in her own right, responsible for her own recipe. For instance, the company charged one worker with figuring out ways to improve the taste, look, quality, and packaging of a particular type of cookie. She “owned” that recipe. The lead entrepreneur also helped guarantee the workers’ employment in the event that she had to sell the business: As a condition of sale, the new owners would be required to hire all existing employees.

The Jury’s Still Out: The EMR Project

One of the biggest constraints in addressing pandemics in resource-poor environments is the scarcity of physicians. Botswana is a case in point. Its population is being hollowed out by AIDS-related deaths in the economically active 18-to-50 age group. The EMR Project set out to develop an electronic medical records (EMR) system that would help improve patient care. Eventually, the entrepreneurs thought, the system could alleviate the unbearable workload of the country’s physicians by allowing nurses to diagnose conditions and prescribe medications for stable patients, consulting doctors only when necessary. The following guidelines were most relevant to this project:

Scope.

The venture managers wanted to make at least $80,000 in profits per year and increase the length and improve the quality of life of at least 20,000 patients for at least eight years. With these goals in mind, the project initially trained four nurses to use the EMR system at a pilot site, with an eye toward expanding to at least 70 nurses nationwide. The leaders of the initiative adopted several nonnegotiable rules of engagement. First, high-quality patient care was the number one priority; typical health markers in AIDS patients (such as viral load and CD4 counts) were to be used as measures of quality. Second, patient confidentiality was to be upheld. And third, the project had to comply with the health care laws of both Botswana and the United States.

Discovery.

The first hypothesized unit of business was a suite of reports containing clinical data that could be purchased by pharmaceutical companies conducting AIDS research in Botswana. The reports would contain anonymous data from patients who had opted in to the project. The research, it was hoped, would yield improvements in preventive and palliative care. As the venture unfolded, however, it became clear that the pilot site was too small for large research projects; and negotiating multiple patient privacy protocols was too complex at such an early stage. So the primary unit of business became an annual software license contract for clinics and health insurance providers interested in using the EMR system’s data to improve their client management and claims processes. Instead of trying to launch a major nationwide program with full EMR and diagnostic capabilities, the project focused on a single private clinic (the largest) and started to build records for 16,000 patients.

Disengagement.

The EMR Project gives patients and caregivers access to information about real-time physiological responses to treatment and non-adherence to treatment. So the venture pledged to do no harm: If it needs to exit the market, it will help to maintain this reporting and diagnostic capability by identifying an EMR with similar capabilities and transferring all patient data to its system.

The EMR Project has undergone a number of deliberate redirections, precisely because its leaders haven’t figured out how to alleviate the fallout from AIDS and HIV-related illnesses while generating profits from any of their business model revisions. They have been able to continue probing for solutions at a relatively low cost, however: One redirection occurred when patients overwhelmingly said they wanted the same visual aids the physicians used: charts showing the rise and fall of their health markers according to whether they took their medications. This request led to a study to determine whether text messages reminding patients to refill their prescriptions and attend regular consultations with their doctors would increase their adherence to drug regimens and scheduled clinic visits.

Entrepreneurs in Botswana hope low-cost revisions will help them find a better model for an EMR project.

The data are currently under analysis. Should text messaging prove effective, the next steps would be to determine the impact of increased adherence on important patient outcomes. If such a study demonstrated positive effects on patient health, the text message reminders could become a component of the EMR business model. However, if the study showed little or no impact on patient adherence and outcomes, and if no sustainable revenue model can be found, the project could be terminated.

The Plug’s Been Pulled: The Peanut Project

Peanuts, in combination with milk, can fulfill about 90% of a person’s nutritional requirements. But shelling peanuts by hand is arduous, and the cost of modern peanut-shelling equipment is prohibitive for most small-scale producers. The initial concept of the Peanut Project was to encourage relatively isolated rural communities in Africa to grow nuts in order to supply local entrepreneurs who would build small, low-cost plants to process the crops, improving the local distribution of peanuts. In the event of success, a proposed extension of the program was to increase production of the nuts and export them to higher-value customers in more-central locations, such as South Africa. The following guidelines were crucial in assessing the project’s viability:

Scope.

To determine if its efforts would be worthwhile, the venture defined its scope according to a minimum number of tons of peanuts to be processed and jobs to be created relative to a minimum net profit of $75,000. The project also set the following rules: Secure a safe central processing center. Obtain permissions and authorizations from the local chiefs and village heads. And retain a full-time entrepreneur with the local agricultural experience and skills required to build and manage a processing plant and oversee a network of growers.

Sociopolitics.

For rural farmers accustomed to being in control of existing crops and using stored produce to generate cash as needed, the idea of harvesting and then giving up their crops to a third party for processing was hugely suspect. Furthermore, in many rural areas of Africa, arable land is assigned by chiefs or village leaders to growers they deem worthy. The lead entrepreneur quickly understood that he would need buy-in from these elders before the project could launch.

Discovery.

The envisaged business model and path to scale for the Peanut Project resembled that of the Feeds Project. In the peanut-processing case, however, a critical driver of success was the management of product “shrinkage” across the logistics chain. Discovery-driven planning showed that a loss of as little as 5% would compromise the likelihood of generating the minimum net profit. The second most influential driver was the transportation of peanuts to the processing facility and then to market. Given the scarcity of trucks, poor roads, and high fuel prices, even the best product was unlikely to capture a high enough price for the growers to compete. These practical realities invalidated the early-stage assumptions. The entrepreneurs were unable to design a system to cope with them or to redirect the project in a way that would attract management know-how. Reluctantly, the venture leaders terminated the project.

Taken together, the five guidelines we’ve derived from our fieldwork offer an effective framework for all organizations—not just entrepreneurs and social enterprises—seeking to create radically new and profitable markets. Large, incumbent organizations and startups alike can use them to create markets for their products. Nonprofits, NGOs, and foundations with limited resources can improve their odds of affecting society in the ways they intend. The discipline engendered by these guidelines—you’ll necessarily come back to the framework again and again as your business evolves—will ensure that you maximize limited resources in pursuit of your goals.

A version of this article appeared in the September 2010 issue of Harvard Business Review.

James D. Thompson (jamestho@wharton.upenn.edu) teaches innovation, entrepreneurship, and corporate growth at the University of Pennsylvania’s Wharton School of Business. He is a cofounder and director of the Wharton Societal Wealth Program.

Ian MacMillan is the Dhirubhai Ambani Professor of Innovation and Entrepreneurship at the Wharton School.

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